T.C. Memo. 2015-35
UNITED STATES TAX COURT
RICHARD CHARLES LUSSY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20898-13. Filed March 3, 2015.
Richard Charles Lussy, pro se.
Brandon S. Cline, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Respondent (Internal Revenue Service or IRS)
determined deficiencies in petitioner’s 2010 and 2011 Federal income tax of
$2,340 and $3,025, respectively. The issues for decision are: (1) whether
petitioner is entitled to various deductions claimed on Schedules C, Profit or Loss
From Business, for 2010 and 2011 in excess of those the IRS allowed; (2) whether
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[*2] petitioner is entitled to deductions claimed on Schedule A, Itemized
Deductions, for 2010; and (3) whether petitioner is entitled to a net operating loss
(NOL) carryforward for 2010.
All Rule references are to the Tax Court Rules of Practice and Procedure,
and all section references are to the Internal Revenue Code in effect for the years
at issue. All monetary amounts are rounded to the nearest dollar.
FINDINGS OF FACT
Some of the facts and exhibits have been deemed established for purposes
of this case in accordance with Rule 91(f).1 We incorporate these facts into our
findings by this reference. Petitioner resided in Florida on the date his petition
was filed.
1
On August 27, 2014, the IRS filed a motion to show cause why proposed
facts and evidence should not be accepted as established under Rule 91(f).
Attached thereto was a proposed stipulation of facts. By order dated September 2,
2014, the Court granted the IRS’ motion and ordered petitioner to file a response
thereto in compliance with the provisions of Rule 91(f)(2), showing why the facts
and evidence set forth in the IRS’ proposed stipulation of facts attached to the
motion should not be deemed accepted as established for purposes of this case.
On September 26, 2014, petitioner submitted a letter to the Court in response to
the Court’s September 2, 2014, order. Petitioner’s letter was not fairly directed to
the IRS’ proposed stipulation of facts and was evasive. Accordingly, the Court
made its order to show cause absolute and deemed established the facts and
evidence set forth in the IRS’ proposed stipulation of facts.
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[*3] I. Background
During 2010 and 2011 (years at issue) petitioner was self-employed as a real
estate appraiser, operating his business, Richard Lussy & Associates, in Florida as
a sole proprietorship. During 2010 he also worked for the U.S. Census Bureau as
an employee.
II. 2010 and 2011 Returns
Petitioner timely filed Forms 1040, U.S. Individual Income Tax Return, for
2010 and 2011. He attached to each of these returns a Schedule C on which he
reported his gross income and expenses from his appraisal activities.
On his 2010 Schedule C petitioner reported gross income of $22,015 and
expenses of $46,304, resulting in a loss of $24,289. On his 2011 Schedule C
petitioner reported gross income of $21,550 and expenses of $73,563, resulting in
a loss of $52,013. Petitioner’s expenses for both 2010 and 2011, as reported on
Schedules C, included the following:2
2
Petitioner also deducted as expenses $1,188 and $1,000 for advertising in
2010 and 2011, respectively; $1,814 and $485 for car and truck in 2010 and 2011,
respectively; and $2,861 for insurance in 2010. In the notice of deficiency,
discussed infra, the IRS allowed these expenses as deductions, and with respect to
advertising expenses allowed an amount greater than that claimed by petitioner.
Further, for 2010 the IRS allowed petitioner an added deduction of $1,040 for
taxes and licenses, and for 2011 the IRS allowed a nonclaimed deduction of $95
for utilities expenses.
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[*4] Expense 2010 2011
Depreciation and sec. 179 $1,188 ---
Interest--other 2,109 $4,558
Legal and professional services 3,457 3,097
Repairs and maintenance 2,339 253
Supplies 8,012 852
Taxes and licenses 105 2,010
Travel 2,823 ---
Utilities 1,156 ---
1
Other --- 61,308
1
Petitioner’s other expenses included $320 for postage, $623
for telephone, $57 for “Ford Tarus [sic] License Plate For Highway
Use”, $608 for medical, and $59,700 for “Business Carryforward”.
Petitioner attached a Schedule A to his 2010 return, claiming $84,473 of
total itemized deductions. These itemized deductions included $912 for medical
and dental expenses, $15 for tax preparation fees, and $83,546 for other
miscellaneous itemized expenses.3 The $83,546 of other miscellaneous itemized
expenses included the following:
Expense Amount
Attorney and accounting fees $3,457
Business property appraisal bad debt 59,700
Business equipment and machines 592
Office copy expenses 492
Business postage 389
3
Petitioner reported negative adjusted gross income; thus, he did not reduce
his medical and dental expenses or miscellaneous itemized deductions pursuant to
sec. 213(a) or sec. 67, respectively.
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[*5] Business telephone & adver. 2,344
Business reputation legal fees 3,457
Appraisal business education 2,823
Appraisal related interest paid 4,679
Home office 2,912
Business total miles 3,628 × $0.50 1,814
Business insurance term 822
License plate--Tarus 65
On his 2010 return petitioner reported an NOL carryforward of $59,700.
Petitioner reported his total tax for both 2010 and 2011 to be zero and claimed a
refund for each year.
III. Notice of Deficiency
On June 13, 2013, the IRS issued a notice of deficiency to petitioner for
2010 and 2011. With respect to petitioner’s 2010 Schedule C, the IRS allowed
him a deduction for each of the following: $95 for utilities, $1,145 for taxes and
licenses, and $200 for supplies. The IRS disallowed all of petitioner’s claimed
deductions for depreciation and section 179, interest, legal and professional
services, repairs and maintenance, and travel expenses.
With respect to petitioner’s 2011 Schedule C, the IRS allowed him a
deduction for each of the following: $1,165 for taxes and licenses and $200 for
supplies. The IRS disallowed all of petitioner’s claimed deductions for interest,
legal and professional services, repairs and maintenance, and “other expenses”.
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[*6] The IRS also disallowed all of petitioner’s claimed itemized deductions and
claimed NOL for 2010.
OPINION
I. Burden of Proof
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and the taxpayer has the burden of proving that those
determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,
115 (1933). However, under section 7491(a), the burden of proof may shift from
the taxpayer to the Commissioner in certain circumstances. Petitioner has not
claimed nor shown that he meets the requirements of section 7491(a) to shift the
burden of proof to respondent as to any relevant factual issue. Accordingly, the
burden of proof remains with petitioner.
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[*7] II. Substantiation of Expenses4
Deductions are a matter of legislative grace, and taxpayers bear the burden
of proving that they are entitled to all deductions claimed. Rule 142(a);
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934). Taxpayers must substantiate the amount
and purpose of the item deducted. Hradesky v. Commissioner, 65 T.C. 87, 89-90
(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976). And taxpayers are
required to maintain records that are sufficient to enable the IRS to determine the
taxpayer’s correct tax liability. See sec. 6001; Meneguzzo v. Commissioner, 43
T.C. 824, 831-832 (1965); sec. 1.6001-1(a), Income Tax Regs. However, in
certain circumstances, if a taxpayer establishes entitlement to a deduction, but not
the amount thereof, the Court may estimate the amount allowable, Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), if the taxpayer provides some
4
At trial petitioner asserted that he had provided “at least a ream of paper of
expenses” to the IRS during the examination phase of his 2010 and 2011 returns
and that his substantiating documentation was not “reviewed in a prudent due
diligent manner”. It is well established that a trial in the Tax Court is a proceeding
de novo and the Court’s determinations are to be based on the merits of the case,
not on any previous record developed at the administrative level. See Greenberg’s
Express, Inc. v. Commissioner, 62 T.C. 324, 328 (1974). Moreover, our standing
pretrial notice, which was sent to petitioner, states that the “parties should bring to
court all documents on which they intend to rely” and that “documents previously
given to the IRS are not part of the record.”
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[*8] rational basis on which an estimate may be made, Vanicek v. Commissioner,
85 T.C. 731, 742-743 (1985).
III. Schedule C Deductions
Section 162(a) authorizes a deduction for “all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business”. A trade or business expense is “ordinary” if it is normal or customary
within a particular trade, business, or industry. An expense is “necessary” if it is
appropriate and helpful for the development of the taxpayer’s business.
Commissioner v. Heininger, 320 U.S. 467, 471 (1943); Deputy v. du Pont, 308
U.S. 488, 495 (1940). Personal, living, or family expenses, however, are generally
nondeductible. Sec. 262(a).
A. Depreciation and Section 179 Expenses
Petitioner deducted depreciation and section 179 expenses of $20,440 on his
2010 return. With respect to these expenses, petitioner testified that he “could
have made a mistake”, and he was unable to recall the exact nature of the
expenses. Because petitioner failed to substantiate these expenses and failed to
provide a reasonable basis on which to estimate the amount of expenses
purportedly paid, we sustain the IRS’ disallowance of the claimed deduction for
depreciation and section 179 expenses for 2010.
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[*9] B. Interest
Petitioner deducted interest expenses of $2,109 and $4,558 on his 2010 and
2011 returns, respectively. He provided no testimony or substantiating
documentation with respect to these expenses. Accordingly, the IRS’
disallowance of the interest deductions for 2010 and 2011 is sustained.
C. Legal and Professional Services
Petitioner deducted legal and professional services expenses of $3,457 and
$3,097 on his 2010 and 2011 returns, respectively. He provided no substantiating
documentation with respect to these expenses. Rather, he testified that he incurred
his legal and professional services expenses in connection with a securities fraud
case that he and his father had filed against a law firm and a bank in the U.S.
District Court for the District of Montana in 1978. Petitioner maintains that he
incurred legal expenses in 2010 and 2011 to “correct falsified public records”
made by Florida State courts in connection with the 1978 case and to obtain
judicial redress for purported erroneous statements made by the Supreme Court of
Florida that petitioner believes caused him to lose an election for county property
appraiser.5 Petitioner failed to show that the expenses claimed for the years at
5
We are mindful that petitioner is litigious and has drawn the ire of a
Federal court as “a disgruntled litigant”, filing separate Federal cases against State
(continued...)
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[*10] issue are ordinary and necessary business expenses. To the contrary,
because the character of the claim giving rise to these legal expenses is personal,
the expenses are not deductible. See Lussy v. Commissioner, T.C. Memo. 1995-
393 (citing United States v. Gilmore, 372 U.S. 39, 49 (1963)), aff’d without
published opinion, 114 F.3d 1201 (11th Cir. 1997). Furthermore, petitioner failed
to provide substantiating documentation to corroborate the claimed expenses.
Accordingly, the IRS’ disallowance of the claimed deductions for legal and
professional services expenses for 2010 and 2011 is sustained.
D. Repairs and Maintenance
Petitioner deducted repairs and maintenance expenses of $2,339 and $253
on his 2010 and 2011 returns, respectively. He provided no testimony or
substantiating documentation with respect to these expenses. Accordingly, the
IRS’ disallowance of the claimed deductions for repairs and maintenance expenses
for 2010 and 2011 is sustained.
5
(...continued)
and Federal judicial officers after they ruled adversely to him. Lussy v. Haswell,
618 F. Supp. 1360, 1360 (D. Mont. 1985). Also, petitioner has been enjoined
from proceeding pro se in any Montana court without obtaining leave to file or
proceed. Lussy v. Bennett, 692 P.2d 1232, 1234 (Mont. 1984). Furthermore, the
Supreme Court of Florida directed the Clerk of the Court to reject civil filings
from him unless signed by a member of the Florida bar. Lussy v. Fourth Dist.
Court of Appeal, 828 So. 2d 1026 (Fla. 2002).
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[*11] E. Supplies
Petitioner deducted supplies expenses of $8,012 and $852 on his 2010 and
2011 returns, respectively. The IRS allowed petitioner to deduct $200 of these
expenses for 2010 and 2011 but disallowed deductions for the remaining claimed
expenses. With respect to all the expenses claimed, petitioner testified that they
were “probably computer and applications and printers and odd things like that.”
He offered no substantiating documentation to corroborate his testimony.
Accordingly, the IRS’ determination with regard to this issue is sustained.
F. Taxes and Licenses
Petitioner deducted taxes and licenses expenses of $2,010 on his 2011
return. The IRS disallowed a deduction for $845 of the amount claimed.
Petitioner provided no testimony or substantiating documentation with respect to
these expenses. Accordingly, the IRS’ determination with regard to this issue is
sustained.
G. Travel
Petitioner deducted travel expenses of $2,823 on his 2010 return. Section
162(a)(2) permits taxpayers to deduct traveling expenses, including amounts
expended for lodging and meals, if such expenses are: (1) ordinary and necessary;
(2) incurred while away from home; and (3) incurred in the pursuit of a trade or
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[*12] business. See Commissioner v. Flowers, 326 U.S. 465, 470 (1946).
Generally, no deduction is allowed for traveling expenses unless the taxpayer
meets stringent substantiation requirements. Sec. 274(d); Sanford v.
Commissioner, 50 T.C. 823, 827-828 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969).
Section 274(d) permits a deduction for these items only if the taxpayer
substantiates through adequate records or corroborative evidence of his own
statement: the amount of the expense, the time and place of the expense, and the
business purpose of the expense. A taxpayer satisfies the “adequate records” test
if he/she maintains an account book, a diary, a log, a statement of expense, trip
sheets, or similar records prepared at or near the time of the incurrence of the
expenditure and documentary evidence of certain expenditures, such as receipts or
bills, that show each element of each expenditure or use. See sec. 1.274-5T(c)(2),
Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). In the absence
of adequate records to establish each element of an expense under section 274(d),
a taxpayer may alternatively establish each element: “(A) By his own statement,
whether written or oral, containing specific information in detail as to such
element; and (B) By other corroborative evidence sufficient to establish such
element.” Sec. 1.274-5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg.
46020 (Nov. 6, 1985).
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[*13] Petitioner testified that he paid deductible expenses in 2010 in traveling to
attend continuing education courses. He did not submit a log or other
corroborating evidence that shows the elements required under section 274(d).
We therefore sustain the IRS’ disallowance of the claimed deduction for travel
expenses for 2010.
H. Utilities
Petitioner deducted utilities expenses of $1,156 on his 2010 return. The IRS
disallowed all but $95 of these deductions. Petitioner provided no testimony or
substantiating documentation with respect to the expenses. We therefore sustain
the IRS’ determination on this issue.
I. Other Expenses
Petitioner deducted “other expenses” of $61,308 on his 2011 return.
Petitioner’s other expenses consist of: $320 for postage; $623 for telephone; $57
for “Ford Tarus License Plate For Highway Use”; $608 for medical; and $59,700
for “Business Carryforward”. Petitioner provided no testimony or substantiating
documentation with respect to these expenses. Furthermore, the amount claimed
as a business carryforward appears to be duplicative of the claimed NOL,
discussed infra, that petitioner claimed elsewhere on his Form 1040. Accordingly,
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[*14] we sustain the IRS’ disallowance of the claimed deduction for “other
expenses” for 2011.
IV. Schedule A Expenses
Petitioner deducted on his 2010 Schedule A $84,473 of itemized
deductions, consisting primarily of an $83,561 deduction for miscellaneous
itemized expenses. A taxpayer may deduct ordinary and necessary expenses paid
or incurred during the taxable year in carrying on a trade or business. The term
“trade or business” used in section 162(a) includes the trade or business of being
an employee. Primuth v. Commissioner, 54 T.C. 374, 377-378 (1970). Most of
petitioner’s claimed itemized deductions appear to relate to his appraisal business,
not to his employment by the U.S. Census Bureau. See Kant v. Commissioner,
T.C. Memo. 1997-217 (discussing the differences between Schedule C above-the-
line and Schedule A below-the-line deductions), aff’d without published opinion,
172 F.3d 859 (3d Cir. 1998). In any event, petitioner provided no testimony or
substantiating documentation with respect to the claimed itemized deductions. We
therefore sustain the IRS’ disallowance of the claimed itemized deductions for
2010.
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[*15] V. NOL
Petitioner deducted on his 2010 Form 1040 $59,700 for an NOL
carryforward. Section 172 allows an NOL deduction to a taxpayer equal to the
total of the NOL carryforwards and carrybacks to the year. Sec. 172(a). Absent
an election to the contrary, NOLs may to be carried back to the 2 prior years, and
if not fully absorbed, are to be carried forward to subsequent years, up to a
maximum of 20 years. Id. subsec. (b)(1)(A), (2), and (3). Taxpayers bear the
burden of establishing both the existence and amounts of NOL carrybacks and
carryforwards. Rule 142(a); Keith v. Commissioner, 115 T.C. 605, 621 (2000).
Petitioner provided no testimony pertaining to the NOL claimed on his 2010
return, nor did he offer any testimony or substantiating documentation with respect
to the proper amount of the purported NOL. Accordingly we sustain the IRS’
disallowance of the claimed deduction for the NOL carryforward for 2010.
We have considered all arguments and contentions advanced by petitioner.
To the extent not herein addressed, we consider them not relevant or meritless.
To reflect the foregoing,
Decision will be entered for
respondent.